Finance Minister Situmbeko Musokotwane has assured the nation that the First Quantum Minerals – FQM’s Kansanshi Mine and ZCCM-Investment Holdings (ZCCM-IH) deal will not result in the loss of the existing 20% shareholding but will facilitate the conversion of dividend rights to revenue (or royalty) rights.
Musokotwane further disclosed that this prospective deal with First Quantum Minerals (FQM) follows extended discussions over the past three (3) years between First Quantum Minerals (FQM) and ZCCM-IH. This deal if approved will be the answer to concern that come when mines declare less dividends but record huge revenues.
The finance minister however has not been able to give detailed justification or computations on how the revenue share of 3.1% on the back of 20% shareholding is the best deal for the country. Some mining experts have indicated that the minister needs to get at least 5% and should not allow the history of paltry dividends to be used as a benchmark for negotiations.
Speaking during a media briefing monitored by the Zambian Business Times – ZBT, Musokotwane said the completion of the transaction is subject to regulatory and other relevant approvals. The transaction that was announced, aims at converting the current ZCCM-IH dividend rights in Kansanshi Mining Plc into royalty [or revenue share] rights.
He said the conversion from dividend rights to royalty rights will not disadvantage ZCCM-IH as it will still retains its 20 percent through the three million (3,000,000) Class A shares with a par value of one US Dollar (US$1.00) each, for the life of mine (until the mine ceases operations).
ZCCM-IH will still retain the right to nominate 2 Board directors with voting rights. ZCCM-IH will also have pre-emption rights in an event that FQM desires to dispose off its shares in the company.
Musokotwane said unlike the dividend revenue model, the royalty revenue are more predictable, guaranteed and consistent. “The right to receive quarterly Royalty payments will ensure that ZCCM-IH is guaranteed a predictable and regular revenue stream over the life of mine of Kansanshi Mining Plc.”
He said the Royalty model is not new as it is being used in the extractive sector in countries such as Canada and Brazil. Royalty rates range from 1 to 3.5 percent in some of these transactions.
“When we assess the dividend model performance from 2009-2021, ZCCM-IH received a total US $337 million. You may wish to note that no amount was received in form of dividends in 2016 and 2017 as no dividend was declared.”
Musokotwane said however that, if the royalty model was in place during the same period, ZCCM-IH could have received a total of US $671 million, which is almost double what was earned.
“Our future projections indicate that just over a 9-year period, royalty receipts will amount to US $625 million which is significantly higher than the amounts received in the last 14 years.”
“The Royalty is from the top-line, represents gross revenue of all metal sales from Kansanshi. Whereas dividends are dependent on company profitability and is at the discretion of the Board as the Board can choose to retain profits within a company for re-investment.”
He said the Royalty will be 3.1 percent of the gross value of all metal sales, that is, a revenue based royalty or top line which will be paid to ZCCM-IH every quarter.
“It will be payable to ZCCM-IH as long as Kansanshi is in production. The arrival at 3.1 percent, is based on the valuation of Kansanshi Mine conducted by independent reputable local and international companies.”
“As the royalty is based on a percentage of the revenue, the Royalty will be increasing with an increase in copper prices. As already stated, the Royalty is for life of mine, which will go up to 2040 with the S3 expansion. In addition, a royalty also protects ZCCM-IH from the worst of a future bear market. If Kansanshi is in production, a royalty will be paid – even if Kansanshi is at any time producing at a loss.”
“Article 210 (2) states that “A major State asset shall be sold, transferred or otherwise disposed of, subject to the approval of the National Assembly”. We wish to state that the transaction at hand is not subject to this article as the transaction is neither a sale nor a disposal. The transaction is a shift from a dividend to a royalty anchored on the variation of class rights attached to ZCCM-IH Class A shares. What has changed in the transaction is the manner in which ZCCM-IH will collect its revenue from a less predictable and risky dividend model to a lower risk revenue based on the 3.1 percent of the top line,” He said.
In 2019 First Quantum Minerals FQM had offered the Zambian government US$700 million to buy off the latter’s 20 percent stake in its subsidiary Kansanshi Mining Plc through ZCCM-IH. It however still remains unknown if government has approved the US$700 million share offer by First Quantum Minerals – FQM as most of these transaction details remain confidential.
